Cross trading securities during time windows at the volume weighted average price

ABSTRACT

Embodiments of a system and method for cross trading a publicly traded security are disclosed. In an embodiment, a cross trade is executed at the volume weighted average price of the publicly traded security calculated for a portion of the trading day. An embodiment of the method includes accepting offers to buy and sell the security during a first window of time, calculating the volume weighted average price of the security during a second window of time, and cross trading the offers. An embodiment of the system includes a user interface for accepting offers, a volume weighted average price calculator for calculating the volume weighted average price at which to execute the cross trade and a cross trade application for executing the cross trade.

CROSS REFERENCE TO RELATED APPLICATIONS

The present patent application is a divisional of U.S. patentapplication Ser. No. 11/706,441, filed on Feb. 14, 2007 now U.S. Pat.No. 7,991,682.

FIELD OF THE INVENTION

Embodiments of the invention generally relate to cross tradingsecurities. Particular embodiments of the invention relate to methodsand systems for cross trading securities at the volume weighted averageprice calculated during a portion of the trading day.

BACKGROUND OF THE INVENTION

Institutional investors are reluctant to buy or sell large quantities ofa security because simply offering to buy or sell a large quantity of asecurity affects the price. For example, if a hedge fund offers to sell100,000 shares of stock in IBM, the price of the stock will drop becauseof an increase in supply. This problem is exacerbated when otherinvestors see that the hedge fund is selling 100,000 shares of IBM, andthey interpret that offer as a signal that the hedge fund's managersexpect the stock price to fall. Consequently, these other investors mayalso try to sell their shares in IBM based on their interpretation ofthe hedge fund's motivation in making the offer. This results in afurther increase in supply that pushes the stock price even lower. Bythe time the hedge fund successfully sells all 100,000 shares, the pricemay be significantly lower than when the initial offer was made. As aresult, the shares of IBM that the hedge fund still holds may be reducedin value. In effect, the market's interpretation of the hedge fund'smotivation becomes a self-fulfilling prophecy. Consequently, theliquidity of the hedge fund's investments is inhibited and its abilityto profitably manage its portfolio is diminished.

In order to avoid these consequences, an investor can request that hisbroker try to arrange a cross trade at the all-day volume weightedaverage price (“all-day VWAP”). If the broker can find someone to acceptthe investor's all-day VWAP cross trade offer, both parties lock intothe trade before the market opens. When the market closes for the day,the broker calculates the all-day VWAP of the security for that tradingday and executes a cross trade at the all-day VWAP. Neither buyer orseller is able to rescind the offer based on any events that take placeafter the market opens.

Investors are reluctant to use an all-day VWAP cross trade, however,because they are locked out of the market for the entire trading day.Consequently, even if the price of a security changes dramaticallyduring the course of the day, the investor is committed to execute thecross trade at the end of the day. It remains challenging for investorsto trade large quantities of securities without the currentdisadvantages.

BRIEF DESCRIPTION OF THE DRAWINGS

These embodiments and other aspects of this invention will be readilyapparent from the detailed description below and the appended drawings,which are meant to illustrate and not to limit the invention, and inwhich:

FIG. 1 shows an example of a cross trading system according toembodiments of the invention;

FIG. 2 shows a timeline for a cross trading system according toembodiments of the invention;

FIG. 3 shows flow chart illustrating an example of a method for tradingaccording to embodiments of the invention;

FIG. 4 shows a timeline for a cross trading system according toembodiments of the invention; and,

FIG. 5 shows a timeline for a cross trading system according toembodiments of the invention.

DETAILED DESCRIPTION OF EMBODIMENTS

The inventors have identified the need to create a new way for investorsto cross trade securities. The inventors feel that the market willaccept a cross trading process which does not require investors to holdthe security for an entire trading day and uses a market drivensettlement price which is unaffected by the trade itself.

It can be appreciated by those skilled in the art that embodiments ofthe methods and systems described herein provide many benefits. Theembodiments allow investors to anonymously cross trade securities at amarket driven settlement price without holding the security throughoutthe trading day. The embodiments also allow investors to make offers forcross trades in the middle of the trading day and have those crosstrades executed in the same day. As a result, investors can achieve ahigher degree of liquidity while maintaining their anonymity and beingable to execute cross trades within a short period of time.

In various embodiments, investors commit to cross trade a securitywithout knowing the settlement price. The investors commit, during afirst time window, to make a cross trade at the volume weighted averageprice (“VWAP”) as calculated during a second time window. After theinvestors have committed to making the cross trade during the first timewindow, the volume weighted average price (“VWAP”) for a portion of thetrading day (the second time window) is calculated for the security. Forexample, a buyer and a seller may agree at 9:39 a.m. (during the firsttime window) that they will cross trade 50 shares of IBM at the VWAP tobe calculated from 9:45 a.m. and 9:50 a.m. (the second time window).After 9:50 a.m., the VWAP for the second time window is calculated, thecross trade is executed and the trade is reported to the exchange onwhich the security is traded.

For example, the VWAP for shares of IBM during a time window whichstarts at 9:45 a.m. and ends at 9:50 a.m. is equal to the sum of thepurchase price of each share of IBM traded during this time windowdivided by the total number of shares traded during this time window. Asused herein, a time window is the period of time between two discretemoments. If, for example, in the time window between 9:45 a.m. and 9:50a.m., 100 shares of IBM were traded at $20/share and 200 shares of IBMwere traded at $35/share then the VWAP for IBM during this time windowis =(($20*100)+($35*200))/(100 shares+200 shares)=$30.

As used herein, a trade is “reported” to the exchange on which it istraded when the exchange is informed of the volume and settlement priceof the trade. The exchange is not informed about the identities of thepurchaser and seller so that their anonymity can be maintained.

FIG. 1 illustrates an example of a system architecture according tovarious embodiments of the invention. Cross trading system 130 mayinclude a user interface 131, a BuyQueue 132, a SellQueue 133, a VWAPCalculator 134, and a report generator 136. In various embodiments,cross trading system 130 may be implemented on, for example, a web-basedserver or another suitable server or computer system. In variousembodiments, user interface 131, BuyQueue 132, SellQueue 133, VWAPCalculator 134, and report generator 136 may be software programs, forexample, or other applications or devices that execute programs inassociation with cross trading system 130. User interface 131, BuyQueue132, SellQueue 133, VWAP calculator 134, and report generator 136 may beprogrammed in any of a variety of suitable programming languages, suchas C++, C, Java, and/or a variety of other kinds of software programminglanguages that may be applied to create instructions in accordance withembodiments of the invention.

In addition, in certain embodiments, user interface 131 can beconfigured to allow administrator 120 to set the duration of one or moretime windows for a security to be calculated periodically based on aformula. For example, the duration of the second time window can becalculated daily as a function of the previous trading day's volume.Administrator 120 can set the duration of the second time window for IBMto the average period of time during which 80,000 shares of IBM weretraded on the previous trading day. If there were 8,000,000 sharestraded on the previous trading day, there would be 100 time windows(8,000,000/80,000) during the current trading day. There are 390 minutesin a trading day (from 9:30 a.m. to 4:00 p.m.), so the second timewindow would last for 3.9 minutes.

In various embodiments, each time cross trading system 130 accepts, forexample, an offer to buy a security from a participant 110, the offer isadded to BuyQueue 132. Similarly, SellQueue 133 records each offer tosell a security accepted from participants 110. BuyQueue 132 andSellQueue 133 are data structures stored in computer-readable media thatrecord the buy offers and sell offers for each security during the firsttime window on a first-in-first-out basis.

In various embodiments, VWAP calculator 134 can be configured tocalculate the volume weighted average price for each security that canbe cross traded in the manner described above.

In various embodiments, report generator 136 can be configured toconvert information into one or more formats so that participants 110can be notified. For example, report generator 136 can format theinformation as text so that participants 110 can be notified by a textmessage.

With reference to FIGS. 2 and 3, timeline and process flow examples ofvarious embodiments of the invention are illustrated. At step 310, crosstrading system 130 accepts offers. Cross trading system 130 may beconfigured to accept an offer if the participant 110 and security areboth eligible. A participant 110 is an eligible participant if theparticipant 110 is on a list of eligible participants maintained byadministrator 120. A security is eligible if it is on a list of eligiblesecurities maintained by administrator 120. When an offer is accepted,it is added to BuyQueue 132 or SellQueue 133, as appropriate.

In various embodiments, cross trading system 130 may be configured toaccept offers during the first time window which starts at T₁ and endsat T₂. At step 320, after the first time window ends (e.g. after T₂),cross trading system 130 can match the offers in BuyQueue 132 andSellQueue 133 in the order in which they were received. It can beappreciated that the number of shares that will be cross traded is thelesser of the number of shares in BuyQueue 132 and SellQueue 133.

At step 330, after the buy offers and sell offers have been matched,report generator 136 transmits a trade status notification to eachparticipant 110 that cross trading system 130 accepted an offer fromduring the first time window in step 310. The trade status notificationindicates how many shares, if any, of the participant's offer will becross traded during the second time window. Both steps 320 and 330 takeplace between T₂ and T₃.

In various embodiments, user interface 131 can be configured to alloweach participant 110 to choose how cross trading system 130 transmitstrade status notifications. For example, participant 110 can choose toreceive trade status notifications by, for example, one or more ofe-mail, text message, fax, or telephone call or by having theinformation displayed in a graphical user interface. In an embodiment,cross trading system 130 can be configured to transmit the trade statusnotification using, for example, the same communication media 150 thatparticipant 110 used to transmit the offer. For example, if participant110 submits an order using a text message, cross trading system 130 mayautomatically send the trade status notification by text message.

At step 340, after T₄, cross trading system 130 retrieves the volume andsettlement price data from security exchange 160 for the security forthe second time window (from T₃ to T₄).

At step 350, VWAP calculator 134 calculates the VWAP for the second timewindow. As described above, the VWAP is the average price at which eachshare was traded during the second time window.

At step 360, cross trading system 130 executes the cross trades forthose shares that were matched in step 320. It can be appreciated thatpart of the execution of the cross trades described in step 360 isreporting the trades to security exchange 160 as well as complying withall regulatory requirements.

At step 370, cross trading system 130 transmits a settlement pricenotification to participants 110 for whom trades were executed at step360. As used herein, a settlement price notification is a notificationtransmitted to a participant 110 which contains the settlement price(i.e. VWAP) at which the trade was executed in step 360. It can beappreciated that the settlement price notification is only sent to thoseparticipants 110 for whom offers were matched at step 320. In variousembodiments, cross trading system 130 can transmit the settlement pricenotification by, for example, one or more of e-mail, text message, fax,or telephone call or by having the information displayed in a graphicaluser interface.

With reference to FIG. 4, in various embodiments, cross trading system130 described above can execute the process flow example illustrated inFIG. 2 such that, for each eligible security, the process describedabove is repeated throughout the trading day.

For example, Window[x] represents the second time window for eachiteration of the process described above. Window[0], the first iterationof the trading day, begins at 9:30 a.m. (i.e. T₃). If the duration ofthe second time window for a security is 5 minutes, then there are 78iterations over the course of the trading day. Window[0] starts at 9:30a.m. and ends at 9:35 a.m. Window[1] (i.e. Window[x+1]) starts at 9:35a.m. and ends at 9:40 a.m. The process may be repeated until the finalWindow[x] of the day, Window[77], which starts at 3:55 p.m. and ends at4:00 p.m.

In various embodiments, as shown in FIG. 4, Window[x] starts at T₃ andends at T₄, then Window[x+1] starts at T₄ and ends at T₅. Thus, offersare accepted for Window[x] from T₁ to T₂ and for Window [x+1] from T₂ toT₃. Window[x] represents the second time window for each iteration ofthe process described above. Window[0], the first iteration of thetrading day, begins at 9:30 a.m. (i.e. T₃). Window[1] starts at 9:35a.m. and ends at 9:40 a.m, . . . , Window[77] starts at 3:55 p.m. andends at 4:00 p.m. It can be appreciated that T₁ and T₂ for Window[0]occur before the beginning of the trading day so Window[0] can start at9:30 a.m.

Referring again to FIG. 2, in various embodiments, the first time window(T₁ to T₂), the second time window (T₃ to T₄), and the delay between thefirst and second time window (T₂ to T₃) may be of equal duration. Forexample, if T₁ is 9:30 a.m. and the duration of the time windows is 5minutes, then T₂ is 9:35 a.m., T₃ is 9:40 a.m., and T₄ is 9:45 a.m. As aresult, offers to cross trade a security at the volume weighted averageprice for Window[2] (e.g., from 9:40 a.m. to 9:45 a.m.) are acceptedfrom 9:30 a.m. to 9:35 a.m. Thus, participants 110 would receive thetrade status notification informing them of how many shares will betraded between 9:35 a.m. and 9:40 a.m.

In various embodiments, as shown in FIG. 5, the Window[x] trade statusnotification must be transmitted within a third time window. This thirdtime window, from T₂′ to T₆′, lasts for a portion of the delay betweenT₂′ to T₃′. For example, cross trading system 130 can be configured sothat the duration of the third time window is, for example, 30 seconds.It can be appreciated that if participants 110 know, for example, thatthe offer was not accepted, alternative arrangements can be made suchas, for example, re-submitting the offer for Window[x+1] or publiclyoffering the shares.

In various embodiments, cross trading system 130 can be configured suchthat the total duration of the first time window and the third timewindow is equal to the duration of the second time window. Referring toFIG. 5, the length of time between T₁′ and T₆′ may be equal to theduration of the second time window (i.e. T₃′ to T₄′). For example, ifWindow[2] starts at 9:40:00 a.m. (T₃′) and lasts for 5 minutes(T₄′=9:45:00 a.m.), then cross trading system 130 can be configured sothat the first time window, during which offers are accepted, lasts for4½ minutes (T₁′=9:30:00 a.m.; T₂′=9:34:30 a.m.) and the third timewindow, for transmitting the Window[2] trade status notification, lastsfor 30 seconds (T₂′=9:34:30 a.m.; T₆′=9:35:00 a.m.).

In various embodiments, cross trading system 130 can be configured suchthat the delay between the first time window and the second time windowis longer than the duration of the first and second time windows.Referring to FIG. 5, the duration of the time window during which offersare accepted (T₁′ to T₂′) may be equal to the duration of Window[x] (T₃′to T₄′). Consequently, the time window for accepting offers is offsetfrom Window[x]. For example, if Window[2] starts at 9:40:00 a.m. (T₃′),and lasts for 5 minutes (T₄′=9:45:00 a.m.), offers can be accepted forWindow[2] from 9:29:30 a.m. (T₁′) to 9:34:30 a.m. (T₂′). Cross tradingsystem 130 transmits the Window[x] trade status notification between9:34:30 a.m. (T₂′) and 9:35:00 a.m. (T₆′). The time window for acceptingoffers for Window[3] begins at 9:34:30 a.m. and lasts for the sameduration as Window[x].

In various embodiments, cross trading system 130 can be configured toallow participants 110 to cancel offers during the first time window.Cross trading system 130 can also be configured to allow administrator120 to specify a number of cancellations that will result in aparticipant 110 being banned from the system. Administrator 120 canspecify both the first period of time during which the specified numberof cancellations must take place as well as a second period of time forwhich participant 110 will be banned.

In various embodiments, cross trading system 130 can be operativelyassociated with communication media 150 that allows participants 110and/or administrator 120 to communicate with cross trading system 130using access devices 115. Each participant 110 may be any type ofinvestor including, for example, an individual, a corporation, apartnership, or an institutional investor such as, for example, aninvestment bank or a hedge fund. Administrator 120 may be any individualwho is given administrative access to cross trading system 130 in orderto perform the administrative functions described below. Examples ofaccess devices 115 include, without limitation, computer systems (e.g.,notebooks), phones (e.g., wireless phones), fax, and personal dataassistants (PDAs). Examples of communication media 150 include, withoutlimitation, wireless networks, wireline networks, and/or a variety ofnetworked media (e.g., intranets or the Internet).

In various embodiments, user interface 131 can be configured to allowparticipants 110 and/or administrator 120 to communicate with crosstrading system 130 using, for example, one or more of a web-basedgraphical user interface, e-mail messages, text messages, telephonecalls, and/or faxes. For example, a participant 110 may employ a PDA ashis access device 115 and submit an offer by sending an e-mail.

In various embodiments, user interface 131 can be configured to allowadministrator 120 to perform administrative functions that areunavailable to participants 110. These administrative functions include,for example, adding and removing securities from a list of securitiesthat are eligible to be cross traded, adding and removing investors froma list of eligible participants, changing the duration of one or moretime windows and/or changing the delay between time windows. Forexample, using user interface 131, administrator 120 may set theduration of the second time window for IBM to 5 minutes and later changethe duration of the second time window for IBM to 10 minutes.

As used herein, a “computer” or “computer system” may be, for exampleand without limitation, either alone or in combination, a personalcomputer (PC), server-based computer, main frame, server, microcomputer,minicomputer, laptop, personal data assistant (PDA), cellular phone,pager, processor, including wireless and/or wireline varieties thereof,and/or any other computerized device capable of configuration forreceiving, storing and/or processing data for standalone applicationand/or over a networked medium or media.

Computers and computer systems described herein may include operativelyassociated computer-readable media such as memory for storing softwareapplications used in obtaining, processing, storing and/or communicatingdata. It can be appreciated that such memory can be internal, external,remote or local with respect to its operatively associated computer orcomputer system. Memory may also include any means for storing softwareor other instructions including, for example and without limitation, ahard disk, an optical disk, floppy disk, DVD (digital versatile disc),CD (compact disc), memory stick, ROM (read only memory), RAM (randomaccess memory), DRAM (dynamic random access memory), PROM (programmableROM), EEPROM (extended erasable PROM), and/or other likecomputer-readable media.

In general, computer-readable memory media applied in association withembodiments of the invention described herein may include any memorymedium capable of storing instructions executed by a programmableapparatus. Where applicable, method steps described herein may beembodied or executed as instructions stored on a computer-readablememory medium or memory media. These instructions may be softwareembodied in various programming languages such as C++, C, Java, and/or avariety of other kinds of software programming languages that may beapplied to create instructions in accordance with embodiments of theinvention.

It is to be understood that the figures and descriptions of theinvention have been simplified to illustrate elements that are relevantfor a clear understanding of the invention, while eliminating, forpurposes of clarity, other elements. Those of ordinary skill in the artwill recognize, however, that these and other elements may be desirable.However, because such elements are well known in the art, and becausethey do not facilitate a better understanding of the invention, adiscussion of such elements is not provided herein. It should beappreciated that the figures are presented for illustrative purposes andnot as construction drawings. Omitted details and modifications oralternative embodiments are within the purview of persons of ordinaryskill in the art.

It can be appreciated that, in certain aspects of the invention, asingle component may be replaced by multiple components, and multiplecomponents may be replaced by a single component, to provide an elementor structure or to perform a given function or functions. Except wheresuch substitution would not be operative to practice certain embodimentsof the invention, such substitution is considered within the scope ofthe invention.

The examples presented herein are intended to illustrate potential andspecific implementations of the invention. It can be appreciated thatthe examples are intended primarily for purposes of illustration of theinvention for those skilled in the art. There may be variations to thesediagrams or the operations described herein without departing from thespirit of the invention. For instance, in certain cases, method steps oroperations may be performed or executed in differing order, oroperations may be added, deleted or modified.

Furthermore, whereas particular embodiments of the invention have beendescribed herein for the purpose of illustrating the invention and notfor the purpose of limiting the same, it will be appreciated by those ofordinary skill in the art that numerous variations of the details,materials and arrangement of elements, steps, structures, and/or partsmay be made within the principle and scope of the invention withoutdeparting from the invention as described in the claims.

What is claimed is:
 1. A method using a computer system of cross tradinga security comprising the following steps: (a) accepting using thecomputer system one or more buy offers for a security during a firsttime window; (b) accepting using the computer system one or more selloffers for the security during the first time window; (c) matching usingthe computer system the one or more buy offers with the one or more selloffers between the first time window and a second time window, whereinthe second time window begins after the first time window ends, andwherein the number of shares matched is the lesser of: 1) the totalnumber of shares in the buy offers received during the first timewindow; and 2) the total number of shares in the sell offers receivedduring the first time window; (d) calculating using the computer systemthe volume weighted average price of publicly reported trades for asecurity executed during the second time window; and (e) executing usingthe computer system cross trades at the calculated volume weightedaverage price after the second time window; wherein the second timewindow is less than one trading day, and wherein a duration of thesecond time window is a function of a past trading volume of thesecurity.
 2. The method of claim 1, further comprising matching the buyoffers and sell offers on a first in, first matched basis.
 3. The methodof claim 1, wherein the duration of at least one of the time windows isfixed.
 4. The method of claim 1, wherein the second time window startsat the start of the trading day.
 5. The method of claim 4, wherein thefirst time window starts before the start of the trading day.
 6. Themethod of claim 1, wherein the duration of the first time window is afunction of the past trading volume of the security.
 7. The method ofclaim 6, further comprising calculating using the computer system theduration of at least one of the time windows using the previous tradingday's trading volume.
 8. The method of claim 1, further comprisingrepeating steps (a) through (e) within the same trading day.
 9. Themethod of claim 1, further comprising maintaining the anonymity of atleast one of the participants.
 10. The method of claim 1, furthercomprising accepting using the computer system one or more offercancellations during the first time window.
 11. The method of claim 10,further comprising banning using the computer system participants whocancel a specified number of offers during a first specified period oftime for a second specified period of time.
 12. The method of claim 1,further comprising notifying the participants of how many of theirshares will be cross traded following the first time window.
 13. Themethod of claim 12, further comprising notifying one or moreparticipants of how many shares of their offers will be cross tradedduring a third time window, wherein the third time window begins afterthe first time window ends and ends before the second time windowbegins.
 14. The method of claim 12, further comprising notifying theparticipants using one or more of e-mail messages, text messages,telephone calls, fax, display within a graphical user interface, and/orvoicemail messages.
 15. The method of claim 1, further comprisingnotifying the participants of the calculated volume weighted averageprice at which the cross trades were executed following the second timewindow.
 16. The method of claim 15, further comprising notifying theparticipants using one or more of e-mail messages, text messages,telephone calls, fax, display within a graphical user interface, and/orvoicemail messages.
 17. The method of claim 1, further comprisingaccepting using the computer system changes to one or more of theduration of the first time window and/or the second time window.
 18. Themethod of claim 1, further comprising accepting using the computersystem a change in whether the security is eligible to be cross traded.19. The method of claim 1, further comprising accepting using thecomputer system a change in whether an investor is eligible submitoffers.
 20. The method of claim 1, further comprising accepting usingthe computer system changes to one or more of the specified number ofoffers, the first specified period of time, or the second specifiedperiod of time.
 21. The method of claim 6, further comprising acceptingusing the computer system changes to the function used to calculate theduration of at least one of the time windows.